Wall Street and City of London Press Panic Button on Catalonia

wolfstreet.com / by Don Quijones • Sep 27, 2017

“Sometimes you have to keep the black swans in mind.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In recent days, JP Morgan Chase, Goldman Sachs and ING, have warned about the political situation in Spain’s richest region, Catalonia, where a banned referendum on national independence is scheduled to be held on Oct. 1.

JPMorgan advised its clients to reduce their exposure to Spanish government debt. Although the bank does not foresee Catalonia achieving independence, it believes that developments in the region could lead to a resurgence in Spain’s risk premium.

In the last five weeks the premium (the cost differential of Spain’s 10-year bonds vis-á-vis Germany’s) has increased from 101 to 121 basis points. It’s still not much compared to the 630 points that it reached at the height of the Euro Debt Crisis in 2012, but it’s enough to get analysts on Wall Street and in the City of London to sit up and pay attention.

Economists in London at Bank of America Merrill Lynch warn of two possible scenarios.

“First, although it is not our central scenario, if we saw a great amount of [social] discontent, markets could react more than they have until now. Nothing has happened yet, but there have been several very tense situations.”

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